HSBC to start selling £25bn of toxic US debt

HSBC is preparing its first sale of sub-prime loans since the height of the
financial crash, as Britain's
largest bank begins to off-load more than $40bn (£25bn) of toxic US debt it
still holds on its books.

HSBC was one of the first banks to recognise the problems in the US sub-prime housing market, where millions of Americans were given loans to buy properties they could not afford.Photo: John Taylor

The bank is planning to sell four sub-prime loan portfolios worth a total of $2.7bn in the next year, with hedge funds already expressing an interest. The disposals will mark the first time HSBC has sold any of its holding of sub-prime debt since the collapse of Lehman Brothers in September 2008 and is intended to kick off the sale of the $44.2bn of toxic debt still held by the bank.

HSBC was one of the first banks to recognise the problems in the US sub-prime housing market, where millions of Americans were given loans to buy properties they could not afford.

The bank's warning in February 2007 of the large losses it said it expected to take on the low-quality mortgages precipitated the credit crunch.

It then morphed over the ensuing 18 months into the financial crisis that brought down smaller British lenders, such as Northern Rock and Bradford & Bingley, and eventually HBOS and Royal Bank of Scotland.

HSBC ended up taking total write-downs as a result of the crisis of $35bn, including nearly $3bn related to its holdings of sub-prime mortgages, according to figures from Bloomberg.

The scale of the write-downs forced the bank to launch the largest rights issue in the history of the London market as it raised £12.5bn from shareholders to help it to cope with the losses from its US business.

HSBC’s exposure to the sub-prime market followed its acquisition of US lender Household Finance. In the wake of the losses, the bank put its US retail businesses into run-down, with the aim of shutting down most of its operations in the country to focus on corporate lending.

Selling off large parts of its toxic debt would mark the final stage of HSBC’s clean up of its US business. The bank is expected to sell the debt off in parcels ranging from $450m to $750m. The disposals will free billions of dollars of capital that HSBC has had to hold against the toxic loans.

Reporting on a meeting last week with Iain MacKay, chief financial officer of HSBC, analysts at Nomura said he expected to book a loss on the sales but that the bank expected them to be positive for shareholder returns.

The interest of hedge funds in buying the toxic loans comes as asset managers now see the chance to make money from trading the debt.